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Part of a ZDNet Special Feature: Data, AI, IoT: The Future of Business

10 companies leading digital transformation in retail

Retailers tend to lag behind when it comes to digital initiatives, but these 10 stores are far ahead of the pack when it comes to using tech like AI, IoT, and AR.

The rise of online shopping has forced the retail industry into a state of crisis, with more than 11,000 stores expected to close in 2018 -- up from 9,000 in 2017, according to a Cushman & Wakefield report.

"These days, retailers are forced to become innovative," said Brendan Witcher, vice president and principal analyst at Forrester. "The challenge is, where does the line between being a good retailer and being a good innovator get drawn? Too many companies take their eye off the ball and the basics of what they need to focus on in innovation."

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Virtually all retail companies now have a digital strategy, Witcher said. The remaining challenges to transformation are in softer elements: Culture, organization, and lack of skills, he added. "Implementing technology is easy when compared to the challenges of change management that need to happen to go from being a traditional retailer, to becoming a digitally led retailer," Witcher said.

SEE: IT leader's guide to achieving digital transformation (Tech Pro Research)

There is no shortage of companies investing in technology to attract and retain customers, said Brian Solis, a principal analyst at Altimeter and author of the report Leading Trends in Retail Innovation. However, for many, "innovation" actually means "iteration," Solis said, meaning that instead of doing new things that create new value, they do the same things but more efficiently.

"Investing in mobile, cloud, or things like augmented reality or new payment systems all improve the customer experience, but I think retail is really struggling in understanding the customer of tomorrow right now," Solis said. "Where I've seen some of the greatest innovation on that front is when companies really try to understand, 'What do we not know?'"

Retail also tends to lag behind other industries when it comes to digital initiatives because projects must be operational before most companies will get on board, said Ananda Chakravarty, a senior analyst at Forrester.

"With retail being so dependent on the margins, there are only so many dollars available for things like R&D and innovation in general," Chakravarty said. "They know they're competing against companies like Amazon with multi-billion dollar budgets dedicated solely to innovation and research and development. It's not something that's ignored -- it's more of, 'How much can we put out there without reducing our day-to-day?'"

Despite the challenges, a number of retailers have embraced the changing landscape and are making strides in digital projects that tap technologies like artificial intelligence (AI), augmented reality (AR), and the Internet of Things (IoT) to radically transform their business and gain new customers. Here are 10 companies that are leading digital transformation in retail.

SEE: Digital transformation: A guide for CXOs (Tech Pro Research)

1. Sephora

Beauty retail chain Sephora has leveraged digital projects to not only survive but thrive in today's retail economy, taking pole position as the no. 1 speciality beauty retailer in the world. The company has used technology to offer a number of unique offerings to customers on their mobile app as well as in the store, as I reported for ZDNet's sister site TechRepublic.

While other cosmetic companies rely heavily on department store sales, Sephora offers customers a number of tech options that allow them to personalize their shopping experience by trying on makeup virtually using AR, matching their skin tone to a foundation with AI, and sampling a fragrance via a touchscreen and scented air.

"Sephora is diversifying its approach to digital transformation by focusing on the areas where other companies are struggling," Solis said at the time. "Specifically, the company has studied digital customers to understand her needs and beauty and social aspirations, how she feels and shops, and more, so they adapted models, processes, and resources internally to compete with purpose."

2. Lowe's

Home improvement chain Lowe's began using AR and virtual reality (VR) testing in its stores with the debut of its 3D virtual Holoroom in 2014, which allows customers to design a room on a computer and then tour it in VR. The company later launched the Lowe's Vision app and View in Your Space feature, which use AR to help customers visualize what the store's products would look like placed in their own home. The In-Store Navigation app helps customers navigate to the products they need in the store.

All of these apps aim to solve a common customer problem: How will you know if something looks good in your space?

"It makes a lot of sense for a company in the do-it-yourself space and other types of spaces as well," Chakravarty said. "There are some niche markets there for that."

3. Home Depot

"Home Depot is doing a fantastic job with their omnichannel capabilities," Witcher said, as the company has successfully facilitated its online sales growth through its brick-and-mortar stores.

With Home Depot's approach, customers can purchase products online and choose to have them shipped either to their home or to their local store for pickup. A buy online and deliver from the store option can get customers their products the next day in a two-hour delivery window. They can also buy products online and return them to the store.

Like Lowe's, Home Depot also introduced wayfinding within its app to help customers more easily navigate store aisles and find what they are looking for. The company reported sales of $23.9 billion for Q4 2017, a 7.5 percent increase from the year before.

4. Walmart

In some Walmart stores, Bossa Nova robots move throughout the store, scanning shelves and alerting managers to the state of inventory in real time. Offering fast information about how products are performing within stores and across locations can help the retailer build a predictive inventory model and keep prices competitive, ZDNet reported.

"These are powerful tools they're using for things like inventory management, and being able to do that in an automated fashion without engaging the sales reps or associates inside the store, giving them more time to actually engage with customers," Chakravarty said.

5. Lolli and Pops

Candy and gift retailer Lolli and Pops may be small compared to others on this list, but it has a powerful digital project underway, Chakravarty said. The company recently introduced Mobica, a facial recognition loyalty program powered by Intel. Customers that opt in to the program can walk into a store, and a camera will recognize their face and send that information to an app on the sales associate's tablet. With that data, the associate can access the individual's taste profile, allergies, and other information, and be able to offer personalized product recommendations via AI-enhanced analytics.

6. Kroger

Grocery store chain Kroger is using in-store analytics to personalize shopping for customers, Chakravarty said. The company is now using predictive behavior modeling to personalize promotions and tailor pricing for its Plus Card members, which has led to a growing digital customer base. As of Q1 2017, growth in mobile visits outpaced overall digital growth, according to the company. Kroger also recently debuted its ClickList service, which allows customers to order groceries online and pick them up at the store.

7. Fabletics

Fabletics is using a digital dressing room tool called omnicart to help identify new customers and create a more personalized experience for them, Witcher said. The tool allows store associates to scan products that a shopper is trying on in an in-store fitting room into an iPad. If the shopper is a Fabletics member and the retailer has their email address on file, the clothes will automatically be placed into their online shopping cart.

After the shopper tries on the clothes, she gives the fitting room attendant feedback on the iPad. If they select "did not like" or complete a purchase in store, the item is removed from their online shopping cart. Otherwise, it will stay there, if they want to purchase it later.

Customers who shop with Fabletics through multiple channels like this are 3.2x more profitable for the company than those who only shop on one channel, according to the company president.

8. Macy's

In 2016, Macy's began rolling out an RFID initiative to track every item across its fleet of stores and fulfilment centers. When the company first expanded RFID to its fashion departments, its sales volume grew more than 200 percent, according to some estimates -- which was not a surprise, as inventory accuracy can increase item availability, leading to sales increases.

"It reduces shrinkage and waste inside the store, in addition to improving the ability for associates to track particular products and inventory," Chakravarty said. "It's a powerful tool."

9. Best Buy

Best Buy has been working with partner 3C Interactive to tap a growing communication protocol called Rich Communication Services that can enhance basic text messages with product images, maps for in-store pickup, and more details on purchases. This creates a more seamless interaction between in-store and online communication.

"They're finding different ways of connecting with the customer through the mobile device," Chakravarty said.

10. Neiman Marcus

Department store Neiman Marcus founded an innovation lab in Dallas, TX, in 2012 to test new technologies. The store has since rolled out Memory Mirrors -- giant video screens and cameras that allow shoppers to see outfits in 360 degrees and compare clothing options side-by-side -- in some locations.

The retailer also launched the Snap Find Shop visual search feature in its app, which allows customers to take a photo of a shoe, handbag, or clothing item and find a similar style in the store's product line using AI.

These projects and others seek to alleviate pain points for customers and make the shopping experience easier and more fun. "It's almost like Innovation as a Service, where they tackle challenges and also look at new opportunities where they can have an effect," Solis said.

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